Spare Parts Inventory Management

I am currently involving in the Spare Parts Inventory
Management Project. I need to find out what will be
the minimum and maximum inventory I need to store in
all country warehouses based on past demand. In this
regard, I need following clarification:

1. Do a three year ABC analysis on Excel
2. Identify the A items--High Usage--15 to 25percent of the line Items
and
high dollars expended around 80%
3. Identify the B items---Medium Usage--- 20 to 25% of the line items
and an
added 15% of the dollars
4. Identify the C items--Low Usage---50 to 70% of the line items and
about
5% of the costs expended for spares.

Look at lead times and set a minimum Days of Supply based on the average
daily usage over the past three years.

Manage the DOS so it does not fall below a point where the lead time is
going to allow you to run out of the spare part.

It is not rocket science. And you do not need any sophisticated
software. It
is basic Inventory Planning and Control of a commodity product "Spare
Parts"
whose usage is predictable based on historical actuals.

what you have suggested it perfectly viable if there is essentially
constant demand for these spares. In this scenario I would also run a
variance analysis to work out what the Safety Stock levels should be, and
the parameters for that are very much dependant on the organisation. For
example, is a 95% service level acceptable, or should it be 99.9% Does the
service level have to be the same across all items. etc. etc.

Based on these results, you might find that the safety stock levels are
unrealistic, in which case you should probably shift to an MPS style of
stock management. By the way, Just in Time and Kanban is really Min/Max
dressed up in Japanese clothes when it comes to Inventory Management .
What is unrealistic? Again that is organisation dependant, and I've found
that the informal "suck" test is probably the best guide. Take the numbers
to the manager responsible for Inventory in the organisation, and see what
their reaction is when they see them. If they don't react, the number are
OK. If they suck in a little bit of breath, then the numbers need
refining. If they suck in a lot of breath, then you need to try something
completely different.

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Keep in mind that doing inventory planning based on prior usage
history can get you into a lot of trouble. Demand does not
always follow history. Replaced parts may have been defective
originals and will not fail again with similar frequency. New
products will contain new components with no previous
replacement history. Field populations of equipment to be
serviced, and usage rates for that equipment may change.

I recommend working with your engineering, sales and field
support organizations to develop a viable cross section of units
in the field and what their utilization rates and parts failure
rates are. Use this information to develop a forecast of spare
parts requirements.

While it is acceptable and necessary to confirm the forecast
against prior history (which should have been used to determine
failure rates) you should base inventory stocking levels and
re-supply orders on what you expect the demand to be, not what
it was 3 years ago.

Yeah, it is more work. But then that is what they pay you the
"big bucks" for.

A careful study of the suggestions of Paul Ames, Darryl & Murray will show
you the a clear direction towards the solution. I tried to put all their
suggestions together in one perspective and a solution seems to be emerging
.

1) *Paul Ames *mentioned "*Look at lead times and set a minimum Days of
Supply based on the average daily usage over the past three years*.". He
mentioned two points here:

· supply lead times and

· daily usage

As you must have realized by now, knowing the supply lead times to each nod
e
is important, though I am not comfortable about computing the daily usage
based on the previous three years historical usage. This is where, Murray's
suggestions comes in

2) *Murray** 's* practical suggestion of computing the usage by *analyzing
the consumption pattern of the equipment in field* is very important

This would tell us the volumes of the forecasted demand of different spares
that we are looking at.

So, by now, we know the supply lead times to each node and the estimated
consumption at each node. Now, Darryl's suggestions below complete the
puzzle.

3) *Darryl* mentioned two important points:

· *Defining the target service levels *: You may want to do a
service – cost trade-ff analysis here to decide the service levels for
different spares. Which approach you would use from amongst ABC, VED, FSN
etc,. is a decision that is specific to your environment, and also would
depend on how much money you would like to put in inventory.

· *Analyzing the variance *: You may like to analyze the varianc
e
of the forecasted demand and supply lead times here.

*Now, my two cents*: I guess the above three points complete the picture in
terms of deciding what you want to stock where and how much.
Thanks,

To make this an even more complex issue in some industries, you will
have to look at the average MTBF (Mean Time Between Failure)
estimates/averages for parts and the actual usage of the equipment and
conditions where the equipment was used. For Aircraft, you look at the
actual flight time, weather and other conditions that an aircraft has
been exposed to in order to get any estimate of what parts to expect
back in for repairs (or the number of parts to anticipate back in).

There are some hard measures of use (i.e. hours flown) when an aircraft
has to be pulled off the line for a planned maintenance event and you
have a chance to schedule the acquisition of the spares required for
these events. However, parts fail sooner than most scheduled
maintenance. You can use a lot of the estimating techniques described
below which are based on historical data, but other parts just show up
at the loading dock. Some are truly worn out, while others are in
varying conditions, such as being hit with a fork lift, holes in them
from gun fire, or simply crunched for whatever reason. These are really
hard to predict! Spares are simply a challenge!

as usual from you, some practical examples of what does and does not work.
My last contact with spares was with an oil drilling company. Considering
that down-time for them cost approx $150K per hr and they were in the
middle of the jungle (quite literally - there were no roads - everything
was flown in!), the cost of spares was almost irrelavent. They were,
however, able to operated with a simple min/max system and high safety
stock levels. On some slow moving, high value parts we had a max of 1, and
min of 0. This effectively replenished the item whenever it was used, and
the safety stock levels covered the variances in demand.

The information contained in this email and attached files is strictly
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It is really a nice effort on your part to amalgamate some v
ery good suggestions and conclude on the direction towards development of t
he technology solutions for the spare parts inventory management system.

Supplementing the above,the strategy for development of such system woul
d also depend upon the business model of the enterprise aiming at such syst
em. For instance, whether the enterprise has manufacturing and production s
ystem in place OR the spare parts are procured from others and set to sales
through retail outlets, their reliability/dependability on other vendors f
or supply of the spare parts and warehouse,logistics,sales and distribution
networks in place.Whether the enterprise has the spare repairing sub-syste
m also.
Also specific to the business model and need of applying the d
ecision mapping to the spare inventory management system.The moot questions
need to be addressed (according to the business model) would be as follows
:
What could be the basis of inventory based on the preferences of the b
uyers (based on the experience) of what is in demand at what location-that
is new spares or the refurbished spares?
What is the equation with the tr
ading partner (or the competitors) that can influence the supply chain?
W
hat factors would determine the resources to prepare a balanced operating b
udget for the production/supply/maintaining stock of the spares?

>Hi psaravana,
>
> A careful study of the suggestions of Paul Ames, Da
rryl & Murray will show
>you the a clear direction towards the solution.
I tried to put all their
>suggestions together in one perspective and a s
olution seems to be emerging
>.
>
>
>
>
>1) *Paul Ames *mention
ed "*Look at lead times and set a minimum Days of
>Supply based on the av
erage daily usage over the past three years*.". He
>mentioned two points
here:
>
>· supply lead times and
>
>· daily usa
ge
>
>
>
>As you must have realized by now, knowing the supply lead
times to each nod
>e
>is important, though I am not comfortable about
computing the daily usage
>based on the previous three years historical u
sage. This is where, Murray's
>suggestions comes in
>
>
>
>2) *Mu
rray** 's* practical suggestion of computing the usage by *analyzing
>the
consumption pattern of the equipment in field* is very important
>
>

>
>This would tell us the volumes of the forecasted demand of differen
t spares
>that we are looking at.
>
>
>
>So, by now, we know the
supply lead times to each node and the estimated
>consumption at each nod
e. Now, Darryl's suggestions below complete the
>puzzle.
>
>
>
>3
) *Darryl* mentioned two important points:
>
>· *Defining the
target service levels *: You may want to do a
>service – cost trade-ff
analysis here to decide the service levels for
>different spares. Which
approach you would use from amongst ABC, VED, FSN
>etc,. is a decision th
at is specific to your environment, and also would
>depend on how much mo
ney you would like to put in inventory.
>
>· *Analyzing the v
ariance *: You may like to analyze the varianc
>e
>of the forecasted d
emand and supply lead times here.
>
>*Now, my two cents*: I guess the a
bove three points complete the picture in
>terms of deciding what you wan
t to stock where and how much.
>Thanks,
>
>Ravi
>
>
>
>
>

I enjoy watching what happens in this group when someone asks for specific
help to solve a specific problem in practical manner.

It reminds me of my days at ITT's semiconductor factory in Taiwan. When ever
the line had a problem the enginerring staff set out to create experiments
around the problem to see if their conclusions could be validated. It was a
totally intellectual endeavor leading no where.

It took a year of shutting off the practice to convince them their job was
to get the line running not create scientific hypothesis and allow 1000
people to sit around while they were playing with the intellectual concepts.
Who cares why it went down--getting running is the objective. Polish off
line, and then implement-but in the meantime-KEEP the WHEELS TURNING.

Oftentimes a simple nuts and bolts approach to questions yields more
productivity sooner with higher positive impact on cash and profit.

I am one of those heretics that knows all IT functions in a manufacturing
company must be under the Operations Department.

I must now stand back and see if there are any supporters or decenters.

Paul,
I've been on both sides of that arguement - IS functions belong in IT or
in Operations. I guess where you stand depends on where you sit.
While my experience is in Telecom the problem seems to be the same acros
s industries. The more insular the IT department the slower they seem t
o respond to Operations issues. The best solution I've found is to open
up communications between the departments. That sometimes means 'swapp
ing' managers between the groups for a while so each gets to see what it
is like living in the others' shoes. That has worked well enough that
I've willingly given IT what I did consider responsibilities that 'belon
ged' to Operations.
To give you some idea of how well that worked, I was once introduced to
an IT group by one of my 'trained' IS partners as, "This is Phil, he tau
ght me what customer service means".

Paul:
I believe you and I operate on the same plane. IT is not an independent group running
around with tools looking for a problem to solve. The problem comes first and the tool
second. The same for QC, and a number of 'other' departments (including accounting and
project management). Those departments exist to service a customer not visa versa.

From your shop floor analogy, I see two points that you are trying to
highlight.
1) Are we answering the question effectively?
2) What is the need for so much "intellectual discussion" for such a
specific question?

Coming to the first point, the answer can be Yes or No. Only the person who
asked the question in the first place can answer that. Because, it is he/she
who can judge whether it is useful or not.
Also, the difference between the shop floor analogy and the group's
discussion is that in the former, the troubleshooters are "inside" the
system whereas in the latter the participants are "outside". This difference
means that the participants have no direct control of solving the issue at
hand. They can only provide the inputs to the best of their ability, if they
choose to. Now the choice to do that is specific to every participant and
their individual choice of being in the group. I remember the comment of one
of the members sometime back that as a professional consultant, they may not
like to share their complete knowledge and jeopardise their earnings.
Whereas, on the shop floor, there is no such choice. The employees' job is
to troubleshoot fast and get the things going.

Coming to the second point, from the shop floor analogy, I can see the
concern of ending up doing only the intellectual discussion at the cost of
solving the issue at hand. This should definitely be avoided. At the same
time, this concern should not stop the discussions altogether because, going
back to the shop floor analogy, it can potentially lead to a completely
reactive mode of operations. On the other hand, the discussions, whether
here or on the shop floor will lead to continuous improvements (in
operations and/or knowledge).

You would agree that most of the technology solutions to
the problems can not be generalized and are surely based on the business pr
ocesses which are not exactly similar for different enterprises even in the
same industry segment.Furthermore, the focus is more often strategic altho
ugh even when the operational part of business is being tinkered. Therefore
, initiative for the technology implementation even in the operational area
is called for, not from the operational management wing but from the Top m
anagement who is keen on facilitating the decision oriented process in the
broad strategic context. I shudder to imagine of the consequences if the in
tellect part is put into the oblivious dustbin and the sole concentration i
s on the operational efficiency.
Above views are not to undermine the
importance of the Operational Department or the Operational Management whic
h I had been involved with in most part of my career.

Some of the better forecasting methods include Holt's, Winter's and
multiplicative methods
applying curve fitting techniques. However this does require substantial
past history data,
say about 60 periods. Do you have such history?

You can use the 12 or 24 month past history. If you have say the actual
weekly past usage numbers, the data can be then spread over the necessary
60+ 'weekly' periods to generate the forecast pattern more accurately, which
is then used to create the forecasts for future periods. Obviously all the
three mathematical methods I mentioned need to be tested out to determine
which method has the best fit for now. This may change based on how your
usage pattern changes into the future and another method may become a better
fit.

If you can send me a set of data - generic - all I need is a series of the
past history numbers in a file - preferably in Excel - and I can run them
through our software and send back to you the results.

I come from a manufacturing environment where I spent years redesigning
processes on the shop floor and designing and writing the applications to
support the new process design. My experience does not support your
position. Even in a "manufacturing" company there are many, many
non-manufacturing products and services. A manufacturing company can not be
successful without creating demand for its products. Nor can it continue to
run without all the back office processes as well at those strategic
practices good companies embrace.

There are four overarching processes in every company: Manage the business,
Support the Business, Create Demand and Fulfill Demand. Regardless of
whether a company produces hard goods or services those processes are in
place. IT, along with HR and Finance, exist to Support the Business and
should not report under the Operations Management staff.

That is not to say that the critical processes within the business aren't in
Operations. And those processes need to be supported. So the performance
requirements for those processes must be determined (by the market) and IT
must be ready to support those requirements - the same as HR and Finance.

If your perspective is accurate then HR and Finance and potentially Legal
and all other support services should also report under Operations. I don't
think so. Operations has to provide the products at the cost necessary to
be financially success and at the quality and lead time to meet the market's
expectations. Operations plays a very large role in creating a compelling
Value Proposition for the company.

there is a classic story (which may or may not be legend) about the
movement of the Saturn V rockets in the early days of the space program.
Somebody miscalculated badly, and one of the bridges they had to go under
was too low, but only by a few inches (or centimetres now....). All the
engineers were around the trailer carting the rocket, trying to work out
which part they could remove to get it under the bridge. A small boy
standing by asked why they didn't just let the tyres down.

There are several morals in this story, and the one I like the most is to
look for the simplest solution. Another one, more relevant to this thread
is that we tend to look for solutions using tools and techniques that we
are comfortable with. All those contributing to this thread have
particular backgrounds and strengths, and are relying on them to provide
suggestions. What makes one solution better than another however, is how
well it solves the problem, not the method that was used to solve the
problem.

Like you, I have been in situations where the immediate, practical
solution was the best way to resolve the problem. In fact I am at the tail
end of providing such a solution right now. I have also been in other
situations where the long drawn out "intellectual" process was the right
way to go. As far as forecasting Spare Parts goes, I think that psaravana
now has a range of options to choose from, and considering that we are not
there on the ground with him, that is about as far as we are able to go.
What I am trying to politely say is, (please forgive me if it doesn't seem
polite) I don't agree with your implication that a "non-intellectual"
solution is the only solution, however it is a possible solution, and none
of us will really know unless we are there with psaravana ourselves. I
value your contributions myself, and where they make sense in my
environment, I will put them into practice as much as I do with every
other contributor to this forum. What I believe is important to you and
myself as well, is that we provide a business based solution rather than a
technical solution. On that point, I think nearly all of us agree.

The information contained in this email and attached files is strictly
private and confidential. The email should be read by the intended
addressee only. No confidentiality or privilege is waived or lost by any
mistransmission. The intended recipient of this email may only use,
reproduce, disclose or distribute the information contained in this email
and any attached files. If you receive this email in error, please
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I will not hesitate to support your notion on the IT solutions if only
you replace operations management with "supply chain management"
instead. For manufacturing enterprises to remain globally competitive,
it is becoming unavoidable to address the issues relating to the
end-to-end supply chain rather than the internal supply chain. Many
companies embark on the lean manufacturing, six sigma, lean six sigma or
whatever to improve the manufacturing plants and yet cannot be as
globally competitive as those that have master the art of the extended
enterprise and having strategic out-sourcing and in-sourcing.

As for the spare parts inventory, it will depend very much on the
industry. Boeing's after sales service has been impressive. I was not
able to fly off with the Eva Airways at Los Angeles because one of the
moving parts of the wings was not functioning. The engineers came and
fixed the problem and was trying to be doubly sure that the movable flap
could work on take-off and landing, so they applied a higher torque than
necessary and the bolt broke. The plane was only able to take off the
next day, but I decided to opt for Malaysia Airlines without having to
pay the extra money because of the compensation for the flight delay.
Boeing lived up to their 24 hour spare part availability worldwide.

I am having a Jaguar Daimler classic and have no problem of getting the
spare parts so far. The sole local stockist ensures good after sales
service. This stockist in turn is working closely with the regional
stockist or distributor. Eventhough Jaguar has been taken over by Ford,
the spare parts availability has never been an issue. I guess it has to
do with profitability pegged against inventory carrying costs and
calculated risks. Not surprising if they use a simple form of re-order
point coupled with some safety stock.

>
>
>
> I enjoy watching what happens in this group when someone asks for specific
> help to solve a specific problem in practical manner.
>
>
>
> It reminds me of my days at ITT's semiconductor factory in Taiwan. When ever
> the line had a problem the enginerring staff set out to create experiments
> around the problem to see if their conclusions could be validated. It was a
> totally intellectual endeavor leading no where.
>
>
>
> It took a year of shutting off the practice to convince them their job was
> to get the line running not create scientific hypothesis and allow 1000
> people to sit around while they were playing with the intellectual concepts.
> Who cares why it went down--getting running is the objective. Polish off
> line, and then implement-but in the meantime-KEEP the WHEELS TURNING.
>
>
>
> Oftentimes a simple nuts and bolts approach to questions yields more
> productivity sooner with higher positive impact on cash and profit.
>
>
>
> I am one of those heretics that knows all IT functions in a manufacturing
> company must be under the Operations Department.
>
>
>
> I must now stand back and see if there are any supporters or decenters.
>
>
>
> Paul
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>

Yes, the industry vertical, supply chain structure, degree of collaboration
with the trading partner are all important factors to consider. I think
colloboration significantly improves the quality of the data coming in
(instead of junk in junk out).

In JD Edwards I have come across Spare Parts forecasting.
Generally (for products) in JDE they have 12 forecasting types, and system is able to tell you the best fit from the 12 based on a hold out period that you set.
I am not so sure about how it works for spare parts... it would be great if you could post this in JD Edwards group...

If you take the example of the APS/SCM tools (or winery, spare parts/mainte
nance, growing, etc.) , it's cleary mostly tools developed quickly to get m
arket shares. That's why the best you can get are in-house developments for
some.

A Pareto analysis of the frequency of usage along with the actual lead times
will begin to build a base. Look up in Plossl and Wight or any good book on
Production Inventory Control and it will tell you some methods for doing
this. Min Inventory is a safety stock. Reorder point is a point that
recognizes lead time for each item, Max inventory depends on the number of
days of supply you want to maintain before you reorder.

I differ in this matter, as the best known Inventory Management is done
by I2 and Baan . I2 is a complete Supply Chain Mgt tool and Baan is best
known ERP in Automobile industry. Now it is known as Invensys.

Basically we are shifting our whole data from ordinary form to ERP; it is
Oracle based ERP accessible by all departments like stores, accounts, spare
parts, HR & others. Current system is in-sufficient for our company. We are
having more than 8 thousands employees doing business of spinning & socks
production.Thanks

I think an ERP like Oracle APPs / SAP shall be the absolute matching
solution to your case. Even the Card punching (for attendance) can also
be integrated with these softwares. If needed we can talk also.

Just to update you that BAAN is no more with Invensys. In
a chain of acquisitions, BAAN was sold thrice in past 5 years, First to Inv
ensys, then to another ( perhaps by SAS , not sure ) and finally landed wit
h Infor. Infor is bundling BAAN in its product called INFOR_LN now.